2018 in Pensions

One to remember? Arguably not, but time will tell…

2018 will no doubt be most fondly recalled for events outside the world of pensions – whether that’s the progression (or otherwise) towards a ‘Brexit’ deal, developments in the US - North Korea relationship, or the football World Cup in Russia.

Whilst all of this and other world-changing events were going on, the pensions industry was embarking on its own journey into unchartered territory as it continues to develop to ensure it remains fit for purpose. Jane Ralph considers the biggest pensions news stories that broke during 2018 and how she expects some of them to shape what sponsors, trustees and providers will be doing well into 2019.

Colossal pressure was put on the Pension Protection Fund (PPF) during the year as more and more companies – including some significant high-street names – succumbed in their perennial struggle to survive financially. We also saw unprecedented activity in bulk annuity markets resulting in a record-breaking year for pension transactions.

Supervisory bodies including The Pensions Regulator (TPR), the Financial Conduct Authority (FCA) and the parliamentary Work and Pensions Committee continued to cast a beady eye on occupational schemes, resulting in closer, and ever-expanding scrutiny of funding, corporate accounting and transfer advice.

Like any review of the year, to cover absolutely everything that happened in 2018 would be challenging, so I will focus on a handful of topics, reducing others to mere passing references.

Winter into Spring (Jan – March): The first shoots…

With
Easter already on the horizon, the Department for Work and Pensions (DWP)
unveiled its White Paper to the world – promising a fresh new look at the way
occupational pensions operate in the UK.

Additional
powers for TPR were consulted on later in the Summer (see below), and TPR is now
working on an updated Code of Practice which will set out how prudence can be
demonstrated in a scheme funding context.
TPR will consult this year on how “prudence and appropriateness” might
be defined to provide better balance for employers, trustees and members.

The
DWP is expected to consult later this year on a legislative framework for, and raising
awareness of, the potential benefits of consolidation of defined benefit
schemes.

The
DWP did however rule out measures overriding pension increase provisions in
schemes’ trust deed and rules, though will “continue to monitor developments in
the use of inflation indices”. Following
on from the Barnardos and BT cases, we expect more developments in this regard.

Contrary
to some commentators’ expectations, there was no mention of CDC schemes in the
pensions White Paper despite the Royal Mail having agreed in principle with the
Communication Workers Union (CWU) that employees would gain access to CDC
pension benefits, once the legislative barriers had been removed.

Since
then, we have seen the Parliamentary Work and Pensions Committee conduct its
own review before the Government eventually published a fairly wide-ranging
consultation on how it might make CDC schemes happen – labelled by some as the
next great pensions revolution.

Though
our focus may have been on the White Paper and the first shoots of CDC schemes,
the early part of the year also saw Carillion and Toys R Us go into administration
– the former leaving behind around £600m of unfunded pension liabilities.

TPR
was in court going toe-to-toe with Box Clever over whether TPR was right to
issue a Financial Support Direction to ITV plc (it was, it turns out). Meanwhile BT were in court battling over
which inflation index was best – RPI or CPI.
This wasn’t the last RPI vs CPI question to be asked in 2018, not least
because the BT case is expected to go to appeal…

Spring into Summer (April – June): Blinded by the light…

Arguably,
the biggest story (and certainly one of the largest headaches) of the year came
to a head in late May 2018. The General
Data Protection Regulation (GDPR) came into force across Europe – with little
to no lead-in time (though, in fairness, ample warning!)

Pension
schemes, advisors and trustees grappled with data mapping, privacy notices and
data protection policies. This
particular journey is far from over – it may never be – as we all have ongoing
responsibilities to process personal data in an open and transparent manner,
developing our cyber-security systems as fast as hackers and phishers can
develop theirs.

In
the White Paper (see above), the Government said it intended to strengthen
TPR’s powers in relation to corporate transactions, with a particular eye on
those who “deliberately put their pension schemes at risk”. Expanding on this,
the DWP launched a consultation: “Protecting defined benefit pension schemes –
a stronger Pensions Regulator”, in which it proposed additional
responsibilities for trustees and employers to inform TPR (via a “statement of
intent”) of certain planned corporate activities before they actually
occur.

Furthermore
new standalone powers will eventually give TPR the ability to compel a person
to “attend an interview and explain any facts, events or circumstances”
relevant to TPR’s investigations.

TPR
will be given the power to “inspect records, documents and electronic devices”
of relevant parties, and an expanded “Notifiable Events” framework will lead to
more mandatory reports to the regulator about corporate transactions.

And,
where a sponsoring employer intends to enter a “relevant business transaction”,
a declaration of intent must be agreed with the DB scheme trustees and
submitted to TPR before the transaction is formalised.

The
most eye-watering proposal of all was to increase the potential monetary fines
for non-compliance – for misleading TPR, or for non-compliance with Scheme
Funding regulations – to £1 million. A new
criminal offence will be introduced for “wilful or grossly reckless behaviour”
in relation to a DB scheme, or for failure to comply with a Contributions
Notice issued by TPR.

The
tax year started in April with the planned step up in minimum contributions for
auto-enrolment, and new rules for multi-employer schemes allowing the
triggering of a debt to be deferred if one of the participating companies
ceases to employ active members.

Pot-follows-member was all but abandoned shortly after
this (though the Pensions Dashboard is still very much a live project). And the Supreme Court ruled on ‘what is a
worker’ in the Pimlico Plumbers case.

CVAs seem to be flavour of the month / year / decade –
House of Fraser being one of the latest firms to explore the possibility with
the PPF (albeit to no avail after the company went into administration and
entered PPF assessment anyway). In
a-not-unrelated development, the PPF published CVA guidance for firms in the
middle of the year.

Summer into Autumn (July – Sept): Turning over a new leaf…

The PPF is now having to review its rules for calculating
pension scheme members’ compensation after the European courts ruled that the £39,000
compensation cap was incompatible with the requirement that such an insurance
arrangement must provide at least 50% of the benefits that would have been expected
if the sponsoring employer had not gone bust.

The Equitable Life saga – dragging on since 1999 – looks
to be nearing a long-overdue conclusion as its with-profits policies are
transferred to Reliance Life, and members’ fund values enhanced.

Half year data shows 2018 to be a very busy year for bulk
annuity business. Expectations based on
this and further substantive deals (Airways Pension Scheme and BHS2 Pension Scheme)
result in expectations that over £20bn of business will be placed in 2018 with
similar levels predicted for 2019.

Autumn into Winter (Oct – Dec): Snowed under….

As we trundle into the latter stages of 2018 – noting that the year isn’t over yet – there is still plenty happening despite a very quiet Budget speech from a pension point of view!

It is clear many members (perhaps over 100,000) took
advantage of the ability to completely re-shape their DB pension benefits by
opting to transfer out of their DB scheme.
Whilst many members will have been satisfied with the transfer, it
became clear from press reports, FCA investigations and the spotlight placed on
the issue by the Work and Pensions Select Committee that a lot of individuals
were receiving inappropriate advice, leading to cries of the next pensions
mis-selling scandal.

The second policy statement from the FCA to address this was
issued in October raising the minimum standards of advice and widening the
factors to be taken into consideration.
However it kicked into 2019 one of the most contentious issues it
consulted on: whether to ban contingent charging models. As such the demand for, and debate about, DB
transfer values and IFAs’ role in facilitating them will continue well into
2019 and beyond.

The cat was really put amongst the pigeons (despite being
let out of the bag many, many moons ago) when a High Court ruling confirmed
what we expected all along – that formerly contracted-out DB pensions do have
to be equalised “for the effects of” Guaranteed Minimum Pensions (GMPs) – the
only questions being how? And when?

The case considered several different methods for equalising
and it is expected that the DWP will shortly update its guidance last issued in
2013 to spell out how affected ongoing schemes should proceed. In the meantime, sponsoring companies are
considering the costs – in particular (and for many in the very near term) what
the impact on their corporate balance sheet might be. And with auditors being reminded by their own
governing bodies of the need to be robust in pension audit (following some
discrepancies earlier in the year) they are expecting to see detailed
calculations rather than a broad brush estimate.

State Pension Age finally equalised at 65 for men and
women in October and now is set to increase to 66 and 67 over the next 10
years, with further increases inevitable as life expectancies continue to grow…or do they? The ONS has published
figures suggesting that increases in life expectancy has slowed dramatically
and in some areas of the UK stopped altogether. Could 2018 be the turning point? Time will tell.